First multifamily deal: How old is too old?

[Drew Shirley]

I am looking for my first multifamily deal in Houston, Texas in the 50-100 unit range. My plan is to add value and then re-sell or re-finance.

I was hoping to find a property that was 20 years old or less, but the vast majority of the properties that I see are at least 30 years old and most of them are more than 40 years old. 

When does a property become so old that all the maintenance headaches cancel out the upside?

[Andrew Cushman]

@Drew Shirley, @Michael Le 's response is the concise and accurate answer.  I'll add some thoughts and experience gained from owning properties ranging from 1968 to 1999 construction, about 600 units of which are in TX (including Houston).

First, two general principles:

1. Typically, the older the property, the more frequent and more expensive the headaches - plumbing issues, foundation problems, etc.  Just like people, as buildings age the problems tend to get more frequent, more severe, and more expensive to fix!

2. Older properties carry a higher likelihood of systemic problems: lead paint, poly piping, aluminum wiring, asbestos, environmental issues, etc.  There are ways to deal with each of these, but you don't want to be blindsided by them.

Now, moving more toward whatever your business model is, some other things to consider:

1. Your hold time.  If you are going to buy, renovate, reposition, and quickly (say within 12-24 months) resell a property, the age doesn't matter as much.  As long as you renovate well, even with 1960s construction expenses typically don't start to ramp back up until after a few years.  If you are going to hold for 5-10+ years, you will need to factor in more for R&M and cap ex the older the property is.

2.  Your tolerance for headaches and surprises.  Even with a great 3rd party management company that handles it all, it stinks getting notified that for the 3rd time in as many months you had to spend $2,000 to fix a major water leak.  Oh yeah and the city inspector stopped by, tested some material pulled from your contractor's onsite dumpster, found asbestos, and slapped you with a $30k fine (true story).

3.  Prior renovations performed, as @Andrew Campbell mentioned.  If the property is older but has been fully repiped, rewired, had all the windows replaced, and just got new roofs, you may have fewer problems to deal with than a newer property that hasn't been well cared for.

4.  Location. Much of the older - 1960s and 1970s - product lies in flat or slowly decaying C neighborhoods.  On the other hand, many of those same vintage properties are in great, irreplaceable locations because the city grew around them.  A location like that could very well offset the negatives of owning older property.

5.  Your lender.  Generally speaking, lenders have somewhat of a positive bias toward newer construction.  They perceive it as safer.  This isn't a huge factor, but just something to keep in mind.

6.  Value add.  Often, the older the property, the greater the opportunity for value add, as long as the property is in an area that can support the higher rents.

What do we do?  At this point, I target properties built in 1980 or newer.  I just don't want the extra hassle that usually comes with the older properties.  However, would I pass up a great deal just because it was built in 1974?  Definitely not, especially in this market!

Large swaths of Houston's apartments were built in the 70s, especially in the southwest and eastern parts of town.  In other pockets you'll find a lot of early 80s product.  Late 80s and 90s is almost non-existent.  I bought 1984 product 3 years ago, renovated it, and so far so good!

I hope this helps!

Andrew

P.S.  When buying in Houston, make sure you pay extra careful attention to flood zones!